1. The Strategic Position 5: Stakeholders & Corporate Governance

2. Learning outcomes
Assess the strategic purpose of an organisation in terms of mission, vision, values and objectives.
Analyse the strategic significance of different ownership models for an organisation’s purpose.
Evaluate the implications for strategic purpose of the shareholder and stakeholder models of corporate governance.
Undertake stakeholder analysis as a means of identifying the influence of different stakeholder groups in terms of their power and interest.
Relate corporate responsibility and personal ethics to purpose and strategy.

3. Influences on strategic purpose

4. Mission statements
A mission statement aims to provide employees and stakeholders with clarity about what the organisation is fundamentally there to do.
It should answer the questions:
‘What business are we in?’
‘What would be lost if we did not exist?’
‘How do we make a difference?’
‘Why do we do this?’

5. Vision statements
A vision statement is concerned with the future the organisation seeks to create.
It is an aspiration that will enthuse, gain commitment and stretch performance.
A vision statement should answer the questions:
‘What do we want to achieve?’
‘If we were sitting here in 20 years what do we want to have created or achieved?’

6. Statement of corporate values
A statement of corporate values should communicate the underlying and enduring core ‘principles’ that guide an organisation’s strategy and define the way that the organisation should operate.
Such core values should remain intact whatever the circumstances and constraints faced by the organisation.

7. Objectives
Objectives are statements of specific outcomes that are to be achieved.
Objectives are frequently expressed in: financial terms (e.g. desired profit levels)
market terms (e.g. desired market share)
and increasingly
social terms (e.g. corporate social
responsibility targets)

8. Issues in setting objectives
Do objectives need to be specific and quantified targets?
The need to identify core objectives that are crucial for survival.
The need for a hierarchy of objectives that cascade down the organisation and define specific objectives at each level.

9. Key principles
Focus. Effective statements do not just define what the organisation does but also excludes other activities.
Motivational. Effective statements should motivate employees. They need to be distinctive, credible and authentic and should stretch performance levels.
Clear. Effective statements are easy to communicate, understand and remember.

10. Who are the stakeholders?
Stakeholders are those individuals or groups that depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends.

11. Types of stakeholder
Stakeholders can be divided into internal stakeholders (e.g. managers and employees) and external stakeholders.
External stakeholders are of 4 types:
Economic (e.g. suppliers; shareholders, banks)
Social/political (e.g. government agencies)
Technological (e.g. standards agencies)
Community (e.g. local residents)

12. Stakeholders of a large organisation
Source: Adapted from R.E. Freeman, Strategic Management: A Stakeholder Approach, Pitman, Copyright 1984 by R. Edward Freeman.

13. Stakeholder mapping
Stakeholder mapping identifies stakeholder interest and power and helps in understanding political priorities.
The power and interest of stakeholders depend on the particular issue being considered – different issues require different maps.

14. Stakeholder mapping: the power/interest matrix
Source: Adapted from A. Mendelow, Proceedings of the Second International Conference on Information Systems, Cambridge, MA, 1986.

15. Power
Power is the ability of individuals or groups to persuade, induce or coerce others into following certain courses of action.

16. Sources of power

17. Indicators of power

18. Ownership, management and purpose

19. Ownership models (1) Public companies
Shares are sold to the general public or financial institutions.
Such companies are usually managed by professional managers.
Their objective is to make a financial return for the owners (profit focus).
Unsatisfied shareholders will sell their shares or seek to remove the managers.

20. Ownership models (2) State-owned enterprises
Organisations wholly or majority owned by national or regional governments. They are especially important in developing economies (e.g. China, Russia and Brazil).
Privatisation has reduced their importance but there are many quasi-privatised organisations (e.g. Free schools).
Politicians delegate day-to-day control to professional managers but may intervene on strategic issues.
They need a financial surplus to fund investment but also pursue other objectives in line with government policy.

21. Ownership models (3) Entrepreneurial businesses
Such businesses are substantially owned and controlled by their founders (e.g. Arcelor Mittal and Virgin Group).
With growth, more professional managers and external investors are required.
They typically focus on profit to survive and grow but may also have personal missions favoured by the founder(s).

22. Ownership models (4) Family businesses
Ownership has been passed on from the founding entrepreneur to descendants.
Typically small to medium-sized enterprises (SMEs) but may be very large (e.g. Ford).
The family may retain the majority of shares while floating some shares on the stock market.
Professional managers may be employed but ultimately the family remain in control.
The need to retain family control may lead to rejecting high-risk strategies or those requiring substantial external finance.

23. Ownership models (5) There are other types of organisation:
Not-for-profit organisations (e.g. Mozilla). Frequently charitable foundations that exist to pursue a social mission
Partnerships (e.g. law firms). Organisations owned and controlled by senior employees
Employee-owned firms (e.g. John Lewis). Ownership is spread among all the employees. They may not be able to raise capital easily and may be more conservative in terms of strategy.

24. Conflicts of expectations

25. Stakeholder mapping issues
Determining purpose and strategy – whose expectations need to be prioritised?
Who are the key blockers and facilitators of strategy?
Is it desirable to try to reposition certain stakeholders?
Can the level of interest or power of key stakeholders be maintained?
Will stakeholder positions shift according to the issue/strategy being considered?

26. Corporate governance
Corporate governance is concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organisation.

27. The growing importance of governance
The separation of ownership and management control – defining different roles in governance
Corporate failures and scandals (e.g. Enron) – focusing attention on governance issues
Increased accountability to wider stakeholder interests and the need for corporate social responsibility (e.g. green issues).

28. The governance chain
Figure 5.5 The chain of corporate governance: typical reporting structures
Source: Adapted from David Pitt-Watson, Hermes Fund Management.

29. The principal–agent model (1)
Governance can be seen in terms of the principal–agent model
Principals pay agents to act on their behalf (e.g. beneficiaries/trustees pay investment managers to manage funds, boards of directors pay executives to run a company)
Agents may act in their own self interest.

30. The principal–agent model (2)
The key challenges are:
Knowledge imbalances: agents typically know more about what can and should be done.
Monitoring limits: it is very difficult for the principal to closely monitor the agent’s performance especially if they have diverse interests.
Misaligned incentives: without appropriate incentives agents may pursue their own objectives.

31. Issues in governance
Who are the shareholders – should boards respond to the demands of institutional investment managers or the needs of the ultimate beneficiaries?
The role of institutional investors – should they actively intervene in strategy?
Establishing the specific role of the board – in particular the role of non-executive directors.
Scrutiny and control – statutory requirements and voluntary codes to regulate boards.

32. Different governance models
Shareholder model
Stakeholder model
Advantages
Higher rates of return
Reduced risk
Increased innovation and entrepreneurship
Better decision making
Long term horizons
Less reckless risk-taking
Better management
Disadvantages
Diluted monitoring
Vulnerable minority shareholders
Short termism
Weaker decision-making
Uneconomic investments
Reduced innovation and entrepreneurship

33. The role of boards (1)
A single tier board (typical of the shareholder model in UK and USA):
A majority of directors may be non-executives
Non-executives represent the interests of shareholders
BUT choice of non-executives may be influenced by executives
A two-tier structure (typical of the stakeholder model in Germany, France and the Netherlands):
A supervisory board represents a wider range of stakeholders
A management board plans strategy and has operational control
Major strategic decisions have to be approved by both boards

34. The role of boards (2) Two key issues for boards:
Delegation: strategy can be delegated to management but it is easier to ensure other stakeholders are protected with a supervisory board.
Engagement: The board can engage in the strategic management process but board members may have insufficient expertise.

35. The role of boards (3) Accepted good practice for boards includes:
Operating ‘independently’ of management – the role of non-executives is crucial
Being competent to scrutinise the activities of managers
Having time to do their job properly.
Behaving appropriately given society’s expectations for trust, role fluidity, collective responsibility and performance.

36. Corporate social responsibility
Corporate social responsibility (CSR) is the commitment by organisations to ‘behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large’.1
1 World Business Council for Sustainable Development.

37. Social responsibility stances

38. Questions of corporate social responsibility (1)

39. Questions of corporate social responsibility (2)

40. The ethics of individuals and managers
Ethical issues have to be faced at the individual level:
The responsibility of an individual who believes that the strategy of the organisation is unethical – resign, ignore it or take action
‘Whistle-blowing’ – divulging information to the authorities or media about an organisation if wrong-doing is suspected.

41. Texas instruments’ guidelines
Is the action legal? If no, stop immediately.
Does it comply with our values? If it does not, stop.
If you do it would you feel bad? Ask your own conscience if you can live with it.
How would this look in the newspaper? Ask if this goes public tomorrow would you do it today?
If you know it’s wrong don’t do it.
If you are not sure ask; and keep asking until you get an answer.

42. Summary (1)
An important managerial task is to decide how the organisation should express its strategic purpose through statements of mission, vision, values and objectives.
The purpose of an organisation will be influenced by the expectations of its stakeholders.
The influence of some key stakeholders is represented formally within the governance structure of an organisation. This can be represented in terms of a governance chain, showing the links between ultimate beneficiaries and the managers of an organisation.

43. Summary (2)
There are two generic governance structures systems: the shareholder model and the stakeholder model, though there are variations of these internationally.
Different stakeholders exercise different influence on organisational purpose and strategy, dependent on the extent of their power and interest. Managers can assess the influence of different stakeholder groups through stakeholder analysis.
Organisations adopt different stances on corporate social responsibility depending on how they perceive their role in society. Individual managers may also be faced with ethical dilemmas relating to the purpose of their organisation or the actions it takes.